Inflation inequality: measurement, causes, and policy implications

Jaravel, Xavier ORCID: 0000-0001-9228-2137 (2021) Inflation inequality: measurement, causes, and policy implications. Annual Review of Economics, 13 (1). pp. 599-629. ISSN 1941-1383

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Abstract

Does inflation vary across the income distribution? This article reviews the growing literature on inflation inequality, describing recent advances and opportunities for further research in four areas. First, new price index theory facilitates the study of inflation inequality. Second, new data show that inflation rates decline with household income in the United States. Accurate measurement requires granular price and expenditure data because of aggregation bias. Third, new evidence quantifies the impacts of innovation and trade on inflation inequality. Contrary to common wisdom, empirical estimates show that the direction of innovation is a significant driver of inflation inequality in the United States, whereas trade has similar price effects across the income distribution. Fourth, inflation inequality and non-homotheticities have important policy implications. They transform cost-benefit analysis, optimal taxation, the effectiveness of stabilization policies, and our understanding of secular macroeconomic trends—including structural change, the decline in the labor share and interest rates, and labor market polarization.

Item Type:	Article
Additional Information:	© 2024 Annual Reviews
Divisions:	Economics
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences
JEL classification:	E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level; Inflation; Deflation O - Economic Development, Technological Change, and Growth > O3 - Technological Change; Research and Development > O30 - General O - Economic Development, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O40 - General F - International Economics > F1 - Trade > F14 - Country and Industry Studies of Trade D - Microeconomics > D6 - Welfare Economics > D63 - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
Date Deposited:	20 Jun 2024 10:54
Last Modified:	15 Nov 2024 21:54
URI:	http://eprints.lse.ac.uk/id/eprint/123931

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